Task 1 - Case Study

As part of managing your professional development and maintaining currency, you read many industry articles. You received this following article from Industry Media and decided it might be a good one for the other finance brokers (authorised credit representatives) of DNZ, in order to understand the industry better.

The historic low interest rate of 1.5% which remained the same after nearly two years, is expected to increase "at some point," according to Philip Lowe, Governor of the Reserve Bank of Australia (RBA). Economist Warwick McKibbin concurred stating that this has been shown by the local economic and political climate. The increase is predicted even in global standards as an effect of the rise of climate change policies, digital disruption, and the overall changing global economy.

Due to low inflation, lack of growth in wages, and job insecurity - the present interest rate has failed to catch up with the global interest rates. These in turn mean that household spending is not enough to push the economy forward.

While the RBA is able to influence most interest rates in the economy, and in turn manipulate the demand for borrowing, the banks are assumed to pass the cost on to borrowers. The banks endeavour to shoulder the costs of borrowing funds within their business before passing it on to borrowers via loan repayments.

As the RBA and banks determine the cash rate and interest rates, they do not solely govern the behaviour of the financial services industry.

While this is so, there is the call to prepare for the rate hikes. It is best for borrowers to sort out their finances ahead of time and be mindful of the industry's climate, so that they are aware of interest rate movements. If it is possible, park spare cash in an offset account or use it for paying down the loan.

1.External forces that influence the industry

The financial services sector is continually changing with many external forces impacting the performance and progression of the industry. The impact of these forces are at varying degrees, depending on the timing and level of change.

a.Government, Regulation and Compliance - Government regulation affects the financial services industry in many ways, but the specific impact depends on the nature of the regulation. Increased regulation typically means a higher workload for people in financial services, because it takes time and effort to adapt business practices to ensure that the new regulations are being followed correctly.

b.Employment & Outsourcing - There is an increasing demand for Australian companies to move internal operations and some services offshore due to strong competitive pressures, cheaper skilled labour, as well as advances in communication technologies. Financial Services companies such as major banks and other providers are following this trend. However, the long term negative impact may see a fall in employment in Australia and thus impact the ability for many Australians to borrow and invest.

c.Technology - In recent years, two key developments have helped facilitate rapid advancements in digital technology: information and internet connections have become faster and more reliable, and mobile internet has become increasingly widespread due to the rollout of 3G and 4G wireless internet networks and the popularity of smartphones and tablet computers. These technological advances have been both a challenge and an opportunity for the financial services industry. The free flow of information has intensified the competitive environment and technological advances are providing new means to change internal processes in order to raise efficiency and remain competitive.

d.Population Growth and Trends Population growth effects the financial services in many ways including increased needs for products and services. Population trends show that people are living longer and either remaining in the workforce beyond retirement age or living

longer in retirement. The desire for sustained living standards impacts the financial services industry due to increased product developments such as more flexible superannuation, investment and lending products.

e.Changing customer needs and expectations Demographic and technology changes bring demands for new products and services, along with increasing complexity in customer interactions. Increasing educational standards and increased information via information technology and media, allows borrowers and investors to be better informed when making decisions.

f.Socially responsible investing, sustainability and climate change The increasing physical impacts of climate change, bringing warmer temperatures, increased water scarcity, and more frequent and severe weather events, pose immediate and long-term threats that will ripple by impacting investments made on behalf of financial services clients. Sustainability effects many aspects of a business not just environmental, it also impacts economic prosperity and social well-being. Demand from consumers for better products and services pushes businesses to have more streamlined operations through enhanced technology, quicker turnaround times and the provision of more efficient services.

Case Study questions:

1.You have asked the finance brokers (ACR's) in the DNZ business to consider the article above which will also help them to better explain to their clients and referrers about external impacts that may affect borrowing. Referring to the article above and the AAMC Training learner guide, identify a minimum of three external forces that could influence the move in interest rates and that also dictate the economic and political climate in relation to the financial services industry.